The Finance of Longevity

Pension Income Plays Significant Role in Supporting Retirees’ Spending

How ‘pension households’ hold onto more of their spending power

New research from the Employee Benefit Research Institute (EBRI)

A new study from the Employee Benefit Research Institute (EBRI) finds that households without pensions or annuities outspent their total income more commonly than those with pension or annuities. Specifically, EBRI found that while about a third (34 percent) of households with regular pension/annuity income spent more than their income, nearly half — 46 percent — of households without regular pension/annuity income spent more than their total income, according to the study.

The EBRI Issue Brief, “Spending Patterns of Older Households,” examines the spending behavior of the elderly in the U.S. population for different marital and retirement subgroups using data from the Health and Retirement Study (HRS) 2014 and the Consumption and Activities Mail Survey (CAMS) 2015, a supplement of the HRS. CAMS contains detailed spending information on durable and nondurable expenses. The amount being spent is compared with their income, and potential scenarios for financing gaps are provided. The majority of the households studied have either reached or are on the cusp of retirement.

“In the sample, 43 percent of retired single households and nearly two-thirds of retired couple households reported regular income from pensions or annuities — we know this is likely to decline with future generations of retirees,” says Zahra Ebrahimi, EBRI Research Associate and author of the study. “So it is important to understand the role that pension income plays in supporting the spending of today’s retirees, as well as the implications of fewer retirees having access to such income.”

Spending Patterns of Older Households

Using the Health and Retirement Study (HRS) 2014 and the Consumption and Activities Mail Survey (CAMS) 2015, we examine total spending and its components based on marital and retirement status. We also closely analyze the gap between total spending and total income as defined in the HRS.

Overall, 59 percent of the sample spent less than their income; 41 percent spent more than their income in 2015.
For single and retired individuals in 2015, average spending was $5,000 lower than income; however, median spending was higher than median income by $3,000.

Coupled households where both spouses were retired on average spent 80 percent of their income in 2015; married couples with at least one spouse in the labor force had the lowest spending-to-income ratio with an average of 45 percent.
The single, retired cohort had the highest spending-to-income ratio, with an average of 86 percent. However, their median spending-to-income ratio was very high at 112 percent.

t is important to understand the role that pension income plays in supporting the spending of today’s retirees, as well as the implications of fewer retirees having access to such income...

Food and health costs higher for retirees

As many income replacement approaches assume, our findings support a reduction in housing and transportation expenses for retirees relative to those in the labor force. However, food costs and health expenses were higher for retirees. These observations could merit a different approach for measuring retirement income adequacy as well as further research where a longitudinal analysis is used to assess the changes in spending allocations before and after retirement.

For a single and retired individual in 2015, average income was $21,000 higher for those with regular pension/annuity income compared with those without a pension, while the average total expenditure was $9,000 greater, which was largely driven by a higher share of entertainment and other (gifts and contributions) expenses in total spending.

Married and retired households with pension income, on average, had $16,000 more income than those without pension income; total expenditure was $10,000 more, largely driven by higher dollar-amount spending on the housing, entertainment, and other (gifts and contributions) categories.

While almost 34 percent of households with regular pension/annuity income spent more than their income, 46 percent of households without regular pension/annuity income spent more than their total income in 2015.

Having an IRA or pension account is correlated with surpluses: 71 percent of households with a surplus had IRAs or pension accounts, vs. 52 percent with a deficit.

In addition, account holders with a surplus were less likely to make irregular withdrawals from their account (28 percent) vs. those with a deficit (42 percent).

The probability of having a deficit has a positive correlation with catastrophic medical expenses. For instance, of those who spent 20 percent or more of their income on medical expenses, 85 percent experienced a budget deficit. In comparison, of those who spent 5 percent or less of their income on health-related costs, only 20 percent experienced a deficit.

Read the full report here